Commissioner of Internal Revenue v. Gidwitz'Estate

• Decision Date: 12 May 1952
• Docket Number: No. 10370-1.,10370-1.
• Citation: 196 F.2d 813
• Parties: COMMISSIONER OF INTERNAL REVENUE v. GIDWITZ' ESTATE et al. GIDWITZ' ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

196 F.2d 813 (1952)

COMMISSIONER OF INTERNAL REVENUE v. GIDWITZ' ESTATE et al. GIDWITZ' ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 10370-1.

United States Court of Appeals Seventh Circuit.

May 12, 1952.

Ellis N. Slack, Acting Asst. Atty. Gen., Carolyn R. Just, Helen Goodner, Special Assts. to the Atty. Gen., for Commissioner.

Sidney U. Hiken, Harry R. Hurvitz and Morris W. Needlman, all of Chicago, Ill. (Hurvitz & Needlman and Gottlieb and Schwartz, all of Chicago, Ill., of counsel), for Estate of Gidwitz.

Before KERNER, DUFFY and SWAIM, Circuit Judges.

SWAIM, Circuit Judge.

These two cases involve a petition and a cross-petition, both seeking a review of a decision of the Tax Court of the United States, 14 T.C. 1263, which determined that there was a deficiency in estate taxes in the amount of $33,541.04 against the estate of Jacob Gidwitz, deceased.

The Tax Court determined that a transfer in trust made by the decedent on December 30, 1936, was made in contemplation of death within the meaning of § 811(c) (1) (A) of the Internal Revenue Code, 26 U.S.C.A. § 811(c) (1) (A), and that the amount thereof should, therefore, be included in the value of decedent's gross estate for estate tax purposes. From this part of the decision of the Tax Court the representatives and heirs of the decedent's estate, hereinafter referred to as the "Tax-payer," appeal.

The Commissioner of Internal Revenue petitioned for a review of that part of the decision of the Tax Court which determined that the income to the trust which accrued between the time of the transfer and the date of the decedent's death did not constitute a part of decedent's gross estate for estate tax purposes.

Appeal No. 10371

The decedent, Jacob Gidwitz, died on December 11, 1944, at the age of 80 years. He left, surviving him, the following members of his immediate family.

                                                                Marital
                         Name               Relationship        Status                Age
                  Rose Gidwitz ............... Widow                                   64
                  Joseph L. Gidwitz .......... Son         Married — 2 children        39
                  Gerald S. Gidwitz .......... Son          Unmarried                  38
                  Willard M. Gidwitz ......... Son          Unmarried                  36
                

On December 30, 1936, approximately eight years prior to his death, the decedent created the trust here in issue and at that time transferred to the trust 83 33/100 shares of the capital stock of the International Furniture Company. This represented one-sixth of the total capital stock of that company. The company up to that time had never paid a dividend but it was then planning to pay a total dividend of $60,000 in order to avoid payment of corporate tax on undistributed profits. One of the decedent's purposes in creating the trust was to have the income represented by his one-sixth of that dividend paid to the trust rather than to himself and thereby avoid additional personal liability for the income tax on the $10,000, which would have amounted to approximately $2,000.

At the time of the transfer of the stock to the trust the decedent reported the transfer for gift tax, reporting the value of the shares transferred as $25,929.17. The value of the gift was increased by the Commissioner to $55,416.67 on which the decedent paid a gift tax of $162.50. On the date of the decedent's death the corpus of the trust, including the income accumulated to that time, was valued by the Commissioner at $341,102.02.

The decedent named himself and his wife as trustees of the trust. The trust instrument provided that the income was to be accumulated during the decedent's lifetime and, upon his death, was to be distributed to his children and their descendants per stirpes. After the death of the decedent the income on the trust was to be paid to the decedent's widow during her lifetime. Upon the death of both the decedent and his wife, the principal of the trust was then to be distributed to their children and to the descendants of any deceased child per stirpes. The distribution was to be so made that the total value of property distributed to each child plus the amount then owned by the child would equal the total so distributed and owned by each of the other children or by the descendants of a deceased child. The beneficiaries were given no power to alienate the interests received by them under the trust. The decedent and his wife resigned as trustees on August 5, 1942, at which time their three sons were substituted as trustees.

About the same time that the decedent caused his attorney to prepare the trust instrument he also had the attorney prepare his last will and testament which was executed on November 3, 1936. The will provided that the residue of the decedent's estate should be held in trust by his wife and their three sons and that the income should be paid to the widow during her life. The will also contained provisions similar to those in the trust instrument for the distribution of the principal of the testamentary trust at the death of the widow in such a manner as to equalize the holdings of the three sons or the descendants of any son who might then be deceased. The idea of the provisions in the trust instrument and in the will for equalizing the holdings of the sons originated with the decedent and these provisions were placed in the two instruments despite the efforts of the decedent's attorney to discourage the decedent from the use of such a plan.

The Tax Court found that the decedent had been having some trouble with his heart and that he knew in 1936 that his heart was not in good condition, but the Tax Court expressly found that the decedent "did not believe at that time that he was in imminent danger of death but, on the contrary, he expected to live for a number of years." The decedent did eventually die of a heart attack, coronary thrombosis.

The Tax Court also found that:

"The dominant motive of the decedent in transferring property to the trust created on December 30, 1936, was to provide for his wife, their children and descendants of any deceased child after his death. The trust and the decedent\'s will were parts of an integrated plan for the disposition of the larger portion of his estate upon his death. The trust was a substitute for a testamentary disposition and the transfer of property to the trust was in contemplation of death."

In its opinion the Tax Court pointed out that, although the decedent was an elderly man and was not in the best of health,

"* * * the conclusion that the transfer to the trust was in contemplation of death stems more from the terms of the instrument than from the condition of the decedent\'s health at the time he made the transfer. He was then past 72 years of age and he died about 8 years later from a heart attack. He liked to travel and to fish and he expected to enjoy a number of years of life after 1936."

But the Tax Court said:

"Nevertheless, the terms of the trust which he created, paralleling to a considerable extent the terms of his will, when considered in the light of all other facts, indicate pretty clearly that the transfer to the trust was actually made in contemplation of death."

While admitting that there was evidence that decedent had in mind the avoidance of some income taxes, a purpose connected with life rather than with death, the Tax Court rejected the contention that the decedent's dominant motive was to save income taxes. The Court said:

"However, a disposition which is in effect a testamentary disposition is made in contemplation of death even though, to save taxes, it may be put in the form of an inter vivos trust rather than as part of a will."

The applicable statute on this question, 26 U.S.C.A. § 811(c) (1) (A), provides that:

"The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal * * *.

* * * * * *

"* * * To the extent of any interest therein of which the decedent has at any time made a transfer (except in the case of a bona fide sale for an adequate and full consideration in money or money\'s worth), by trust or otherwise —

"* * * in contemplation of his death; * * *."

The meaning of the words "in contemplation of death" as used in a prior estate tax statute was discussed by the Supreme Court in United States v. Wells, 1931, 283 U.S. 102, 51 S.Ct. 446, 75 L.Ed. 867. In that case the Supreme Court said, 283 U.S. pages 116, 117, 51 S.Ct. at page 451:

"The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. * * * As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor\'s motive. Death must be `contemplated,\' that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition."

In considering the necessity of the transferor's recognizing the imminence of death, the Court said, 283 U.S. at page 117, 51 S.Ct. at page 451:

"As the test, despite varying circumstances, is always to be found in motive, it cannot be said that the determinative motive is lacking merely because of the absence of a consciousness that death is imminent. It is contemplation of death, not necessarily contemplation of imminent death, to which the statute refers."

Again, 283 U.S. on page 118, 51 S.Ct. on page 452, the Supreme Court said:

"* * * the statute is not to be limited, and its purpose thwarted, by a rule of construction which in place of contemplation of death makes the final criterion to be an apprehension that death is `near at hand.\'"

The taxpayer relies heavily on Colorado National Bank of Denver v. Commissioner, 1938, 305 U.S. 23, 59 S.Ct. 48, 83 L.Ed. 20. In that case the Board of Tax Appeals, on facts distinguishable from the facts in the instant case, found that the donor of an inter vivos...